Fiscal Cliff Cometh

Unless Congress acts by the end of the year, more than 26 million households will for the first time face the AMT, which threatens to tack $3,700, on average, onto taxpayers’ bills for the current tax year. Because those people have never paid the AMT, they have no idea they are in its crosshairs — put there by a broader stalemate over tax policy that has kept Congress from limiting the AMT’s reach.

Forget about the much-publicized tax hikes set to take effect for 2013 — if you have a couple of children and annual income over $75,000, chances are good that your taxes are on track to go up substantially for 2012.

At the end of the year, Congress will be the Mother of all Lame Ducks.
Wanna bet there’s more bunji jumping, kicking the can down the road? The Senate and the House are broken and if Obama is re-elected, which seems probable: GRIDLOCK. Our national government is no longer nimble enough (ideological fools) to confront our problems with the resolve to solve them for the common good.

“Progress toward a resolution has been slow in Washington’s polarized environment. Republicans refuse to raise new tax revenue while Democrats are unwilling to cut Medicare, Medicaid and other domestic programs without raising taxes on wealthier households.”

“The International Monetary Fund has warned that the US recovery is “tepid” and urged Washington’s warring politicians to stave off drastic spending cuts and tax rises due in 2013 that could send the economy over a “fiscal cliff”.

In its annual health check of the US economy, known as an Article IV report for 2012, the IMF added its voice to that of other experts, including Federal Reserve chairman Ben Bernanke, who have warned that deadlock on Capitol Hill is jeopardising the US economy.”

Around the halls of Congress, they’re calling it “The Cliff.” Or “The Trainwreck.” Or “Taxmageddon.” Between election day, Nov. 6, and New Year’s Eve, a lame-duck Congress and a president who could be a lame-duck himself will confront the following:

• The expiration of the 2001-2003 Bush tax cuts.
• The expiration of tax breaks granted in the 2009 economic stimulus package.
• The expiration of “patches” to the alternative minimum tax intended to keep upper-middle-income taxpayers from paying a tax aimed at higher-income taxpayers.
• The end of the payroll tax holiday extended earlier this year. Payroll taxes will go back to 6.2% from 4.2%.
• The end of extended unemployment benefits.
• The end of the “Doc Fix,” meaning 30% lower reimbursements to doctors who treat Medicare patients.
• The beginning of “The Sequester,” an automatic cut of $1.2 trillion in spending over 10 years, split evenly between defense and domestic programs, triggered by last year’s failure of the “Super Committee” to reach a deficit-cutting deal.
• The expiration of several “extenders” for popular tax breaks, including the corporate tax credit for research and development and the individual tax deduction for state and local sales taxes.
• And, finally, the debt ceiling will need to be raised again by year’s end, lest the nation default on its sovereign debt. Once this was automatic. Not anymore.

This monumental list of problems would challenge the most capable and cooperative of Congresses. That the dysfunctional 112th Congress can address it in two months is a fantasy. This bunch got its 17% approval rating in the latest Gallup Poll the old-fashioned way: It earned it.

There are serious people at work on the deficit issue, just not enough of them. A bipartisan group of senators is working to find a mixture of spending cuts and revenue increases that both sides can live with. Senate Budget Chairman Kent Conrad (D-S.D.) has proposed a 10-year program modeled on the work of the Simpson-Bowles deficit reduction commission in 2010.

But neither the left nor right wing was happy with Simpson-Bowles. The left didn’t like that it was heavier on spending cuts than revenue enhancements – tax increases or closed loopholes. The right wasn’t happy that it contained any revenue enhancements at all.

So everyone’s waiting for the election.

A deal must be reached, regardless of who wins. Without a deal, nearly everyone in America will see a tax increase. The poor will lose access to services and pay 2% higher taxes. Families in the middle – those earning at the median household income of about $50,000 – would pay an additional $1,700 a year. Twenty-six million more upper-middle-class taxpayers would be socked with the alternative minimum tax. Wealthy taxpayers would not only see their tax rates go up, but they’d also pay more on capital gains and more in inheritance taxes. They will scream the loudest.

The bipartisan Committee for a Responsible Federal Budget estimates that without a deal – if everything falls off the cliff into the Armageddon train wreck – it would cost the economy $1 trillion in 2013-2014. Growth would stop. The economy could plunge back into recession.

The Christmas season will be chaotic. Unless Congress can summon itself in a great national cause, far worse lies ahead.

Why Taxmaggedon is already upon us, in two charts
Posted by Suzy Khimm on July 12, 2012 at 5:11 pm

Ezra pointed out earlier this week that the debate over the fiscal cliff could potentially frighten the markets and harm the economy well before December. In fact, there are signs that we’re headed down that path already. The New York Times flags a policy uncertainty index created by researchers from Stanford and the University of Chicago. The index spiked during the debt ceiling crisis—just as consumer confidence and job growth both slowed. Now the index is back on the rise:

Already, the index is nearly as high as it was during Barack Obama’s inauguration, and it’s getting close to the level of policy uncertainty in the banking crisis of late 2008:

While most stressed the importance of working across the aisle, bipartisan solutions for America’s crushing financial problems will have to overcome salving the parties’ opposite ideological bases. For instance, persuading Rep. Jim Jordan, a tea party favorite and conservative Republican from Urbana, to work with Obama will be a tall order.

“The voters didn’t elect 87 new freshmen and send me back to Congress to raise taxes and compromise with Barack Obama,” Jordan said. “In fact, if you look at what 2010 was about, I would argue they sent us here to stop Barack Obama.”

Such sentiments are the grist for gridlock at a time when the country cannot afford it, said Rep. Steve Stivers, an Upper Arlington Republican.

“We need to come together as Republicans and Democrats,” he said. “I certainly don’t want to say we don’t need Jim Jordan — I’d love to have Jim Jordan vote for something — but we need to get enough votes from Republicans and Democrats to come together with a meaningful approach that we can present to the American people with a straight face and say, ‘This isn’t a Republican idea, this isn’t a Democratic idea, it’s an American idea, and this is how we’re going to solve this crisis.’ ”

Last summer’s debt-limit showdown left a terrible mess to resolve by Jan. 1, when a rash of tax breaks will expire and deep spending cuts will kick in. The resulting $500 billion in reduced spending and increased revenue in 2013 would help trim the nation’s deficit but could push a still-fragile economy back into recession, economists warn.

Serious negotiations to address the problem probably won’t occur until after the election, leaving a two-month lame-duck Congress little time to resolve monumental issues, including whether to extend investment, income and payroll-tax cuts affecting all Americans. There’s also the first phase of $1.2 trillion in automatic spending cuts due to go into effect, about half in defense spending, that must be considered.

Also looming is the thorny post-election issue of raising the debt ceiling. And there is the desire by many in Congress to attempt anew a “go big” solution in the lame-duck session, trying to agree on long-term fixes to the federal tax code while making hard choices needed to sustain Social Security, Medicare and Medicaid.

Sen. Rob Portman, the Ohio Republican who served on the budget “supercommittee” that failed to “go big” last fall, said he has met privately with some Senate Democrats to discuss compromises before the lame-duck session.

“We’re trying to prepare for what’s going to be a fiscal disaster otherwise,” Portman said.

Perhaps when their backs are against the wall in the lame-duck session, Republicans will give a little on tax increases and Democrats will give a little on reforming Social Security, Medicare and Medicaid to whittle down the national debt while shoring up the entitlement programs for the long term.However, interviews with Ohio’s two senators and eight of its House members revealed partisan differences a mile wide.

Almost all agreed that no option should be left off the table, but the question about whether both tax increases and spending cuts are needed exposed a reluctance to divert much from party lines.Republicans uniformly advocated deep spending cuts while favoring renewal of the so-called Bush tax cuts at year’s end, while Democrats generally favored extending them for everyone except wealthy Americans making $250,000 or more.

“You start out by letting them expire for the high-end earners, and you keep them intact for the middle class until we get out of the recovery period,” said Rep. Tim Ryan, a Youngstown Democrat.

“The people who have done very well in the last 10 years are the people making from $300,000 to $500,000 to $1 million a year, it has not been the broad middle class,” said Sen. Sherrod Brown, a Democrat. “I would not support a tax increase on the middle class now.”

Republicans such as Rep. Mike Turner of Dayton opposed repealing the Bush tax cuts and said any increases in tax revenue should go directly toward reducing the $15.7 trillion national debt, not for more spending.

Turner said his meetings with constituents reveal no appetite for more spending: “By and large, there’s some support in every room I’m in for tax increases for paying down the national debt.”

There was general agreement in the Ohio delegation that the federal tax code needs a major overhaul which, if done right, could raise billions in new revenue by, among other things, closing loopholes exploited by some major corporations to avoid paying taxes.

“The point is, to have a fair tax code so that everybody pays taxes,” Portman said.

Equally as difficult as deciding how to raise more revenue are decisions about how to reduce the rate of spending for the massive entitlement programs — Social Security, Medicare and Medicaid. Republicans were more open than Democrats to cutting costs by changes such as subjecting eligibility to income testing, meaning wealthier Americans would receive reduced benefits, and raising retirement ages.

Jordan said increasing the Social Security retirement age “is going to have to happen,” but Democrats such as Rep. Marcy Kaptur of Toledo said that workers involved in hard physical labor “just can’t make it” to a retirement age of 70, for instance, “because their bodies are shot.”

Before the November election, politicians from both parties are avoiding the details of how they would cut spending and raise revenues, but House Speaker John Boehner of West Chester said negotiations must occur before the election to avoid a year-end debacle.

“I don’t underestimate the difficulty of coming to an agreement,” he told reporters on Thursday. “But let’s be honest: We know the end of the year is coming. And we know what’s going to happen. And if we don’t use this opportunity to increase the debt limit and make real changes in how we spend the American people’s money, we’re missing a golden opportunity.”

The fiscal cliff

Congress’ twin predilections to delay tackling difficult issues until after the next election and to wait until the last minute to address a crisis will come to a head at the end of this year when a host of budget issues converge. The crunch totals about $500 billion, or roughly 3.8 percent of the U.S. gross domestic product.

• In late 2012 or early 2013, the federal government is expected to hit the $16.4 trillion debt limit, with worst-case possibilities of a government shutdown or default of U.S. fiscal obligations.
• The first $66 billion of $1.2 trillion in mandatory spending cuts to discretionary accounts (many in defense) over 10 years must be identified and approved.
• About $44 billion in extended unemployment benefits will be reduced once temporary benefits end on Jan. 2.

Source: Peter G. Peterson Foundation, using data from the Congressional Budget Office and the Department of the Treasury

Economists are rightly starting to warn that the United States faces a worrisome “fiscal cliff” at year’s end. The blunt spending cuts mandated by the 2011 compromise on the debt ceiling — and the failure of the “supercommittee” that followed — along with across-the-board tax increases would derail the U.S. recovery and undermine the well-being of the global economy. We should be avoiding the edge of this cliff — and politicians should not believe that they have until the end of this year to act.

In the next few months, possibly within weeks, markets here and abroad will be looking for signals that our politicians understand the severity of the situation and are able and willing to act appropriately. If clear signals are not forthcoming, markets could react early to the looming trouble, compounding the uncertainties that weigh on the U.S. economy.

It is well known that both Democrats and Republicans in Congress have failed in the past few years to address our nation’s difficult fiscal issues. The most visible example is the repeated absence of a comprehensive annual budget. Less obvious but equally important is the large and meaningful collection of budgetary reforms that have been delayed, obfuscated and derailed. In the process, all sorts of spending cuts and tax increases got kicked further down the road. Now, a meaningful and consequential set is coming together in a rather disorderly fashion.

The sequestration mandated by the Budget Control Act of 2011 and the reversal of the Bush-era and payroll tax cuts would essentially mean withdrawing from the economy some 4 percent of the national income in one blunt go — and this doesn’t factor in possible knock-on effects. The importance of this issue cannot be overstated. A fiscal contraction of this magnitude and composition would stop dead in its tracks the economy’s nascent healing and job creation. Consumption and investment would be harmed. Foreigners would become more cautious about buying our ever-increasing debt issuance. And with our internal growth momentum weakened, the headwinds from the European debt crisis could prove overwhelming.

As opposed to such a disorderly big bang, the U.S. fiscal situation requires a carefully designed and well-timed overhaul to make government finances more efficient and fairer — among other things, combining immediate stimulus with a credible set of medium-term tax and entitlement reforms and a sustainable effort to reduce the deficit over time. But rather than addressing our fiscal challenges with a scalpel, America is reaching for a blunt ax that is likely to do more harm than good. Indeed, several items set for implementation at the end of 2012 would impede further economic growth, job creation and medium-term financial stability. Some measures — including cuts to education programs and teaching jobs when our educational system is already under tremendous pressure — would go even further, causing inconsistencies between spending priorities and, in some cases, creating pockets of operational paralysis.

The worries do not stop here. Never mind that it has been less than a year since the last political circus over the debt ceiling caused an economic slowdown, fueled concerns about a double-dip recession and contributed to Standard & Poor’s downgrading the United States’ sacred triple-A credit rating. Just as few in Washington presumed last year that things would reach that point, few think the fiscal cliff will materialize. After all, the deadline was always meant to act as a catalyst for serious revenue and expenditure reforms — including revamping the federal tax code, streamlining entitlements and realigning incentives to favor production and investment rather than consumption and operational avoidance of U.S. tax jurisdictions. But complacency has continued to reign, leaving the country exposed to unnecessary economic trauma and renewed political dysfunction.

Markets are discounters of the future, and prolonged political inaction is likely to encourage companies to postpone building plants and purchasing equipment and to discourage them from hiring.

All this speaks to the importance of acting now to avoid getting too close to the cliff’s edge. The good news is that quite a bit of technical work has been done in Washington on proper fiscal reform, along with background scenario analyses. Also, I suspect that, in their hearts, most politicians from both sides of the aisle recognize that progress necessitates a series of confidence-building compromises that are in the nation’s interest.

But I fear that, once again, we are more likely to witness dithering and bickering in Washington, accompanied by political posturing packaged in competing election-driven narratives. If these concerns materialize, and I sure hope they don’t, the economy will slow during the summer, rating agencies will again get nervous and the political environment will become even more polarized.

It is unfortunately once again time to fasten your economic seat belts.

Washington braced Tuesday for a replay of last summer’s tense battle over the burgeoning national debt as House Speaker John A. Boehner threatened again to block an increase in the federal debt ceiling without significant new cuts in spending.
Treasury Secretary Timothy F. Geithner and other senior Democrats quickly blasted the Ohio Republican, arguing that his ultimatum could put the nation’s credit rating — and the broader economy — at risk early next year, when the debt is expected to hit its $16.4 trillion limit.

“This commitment to meet the obligations of the nation, this commitment to protect the creditworthiness of the country, is a fundamental commitment you can never call into question or violate,” Geithner said. “We hope they do it this time without the drama and the pain and the damage they caused the country last July.”

Others noted that Boehner’s call for fresh spending cuts comes as many Republicans are trying to amend cuts adopted to satisfy GOP demands last summer, arguing that they fall too heavily on defense.

“It is pretty galling for Speaker Boehner to be laying down demands for another debt ceiling agreement when he won’t even abide by the last one,” Sen. Charles E. Schumer (D-N.Y.) said. “The last thing the country needs is a rerun of last summer’s debacle that nearly brought down our economy.”

The dust-up followed the release early Tuesday of prepared remarks that Boehner later delivered at Washington’s Mellon Auditorium, where longtime deficit hawk Peter G. Peterson was staging a summit to encourage policymakers to take action to tame the debt. Participants, including senior lawmakers from both parties, agreed that that is unlikely to happen before the Nov. 6 election.

But once the election is over, they said, the issue of the debt will quickly rise to the top of the agenda — and not just because of the debt limit. In January, policymakers also will be facing the first round of harsh, across-the-board spending cuts adopted last summer, as well as the expiration of a host of tax cuts that benefit every American household. Unless Congress agrees on an alternative deficit-reduction strategy, the policies threaten to deliver a fiscal shock that could throw the nation back into recession.

House Budget Committee Chairman Paul Ryan (R-Wis.), predicted Tuesday that lawmakers would somehow avoid a year-end “train wreck.” The senior Democrat on the panel, Rep. Chris Van Hollen (Md.), said he foresees an effort to “structure a framework” to make the big decisions on taxes and spending in the first part of 2013.

Boehner, meanwhile, made it clear that he is ready to use the debt limit as a cudgel to force Democrats to compromise, particularly on a strategy for restraining spending on Medicare and other federal health programs, which are the biggest drivers of future borrowing.

“Yes, allowing America to default would be irresponsible,” Boehner said. “But it would be more irresponsible to raise the debt ceiling without taking dramatic steps to reduce spending.

“I’m not angling for some higher office,” he said. “This is the last position in government I’ll ever have. I haven’t come this far to just walk away.”

Boehner continued to reject Democrats’ calls for higher taxes on the wealthy. That drew groans from Democrats, who noted that — despite sharp spending cuts — the no-new-taxes House GOP budget would itself require $5.2 trillion in fresh borrowing over the next decade.

“Republicans are playing chicken with our economy and manufacturing an unnecessary crisis,” Van Hollen said. “Even if we made every cut in their budget, it still requires that we raise the debt ceiling by $5.2 trillion. This isn’t just hypocritical, it’s dangerous.”

White House spokesman Jay Carney said, “It can’t possibly be the case that the right prescription for what we need to do right now is to engage in the kind of political brinksmanship that, unfortunately, congressional Republican